INTM602800 - Transfer of assets abroad: Exemptions from charge: Avoidance purpose exemption - all relevant transactions post-4 December 2005

If all the transactions are after 4 December 2005, then section ITA07/S737 applies.

An individual is not liable to income tax in a year by reference to the relevant transactions (INTM602700) if the individual satisfies (INTM602680) an officer of HM Revenue and Customs that Conditions A or B are met.

The two conditions are mutually exclusive. It is not possible for a case to get into Condition B unless Condition A is not met.

Condition A

Condition A is that it would not be reasonable to draw the conclusion, from all of the circumstances of the case, that the purpose of avoiding liability to taxation (INTM602980) was the purpose or one of the purposes for which the relevant transactions or any of them were effected.

Condition B

If Condition A is not met, then Condition B is that all the relevant transactions were genuine commercial transactions (INTM603020) and it would not be reasonable to draw the conclusion, from all the circumstances of the case, that any one or more of those transactions was more than incidentally designed (INTM603040) for the purpose of avoiding liability to taxation.

When considering whether the conditions are met, all the circumstances of the case are to be taken into account, including the intentions and purposes of any person who designs, effects or provides advice in relation to any relevant transaction (INTM600200). It does not matter whether or not they do it for consideration.

The provisions reverse the effect of Herdman (INTM602640) which found that associated operations are in broad terms only taken into account in applying the purpose test if they involve avoidance and create either a new source of income or a new power to enjoy income. The new provision requires all associated operations with an avoidance purpose to be taken into account when applying the exemption test.

In the past, structures such as family trusts were sometimes transformed into avoidance vehicles, with the associated operations carefully designed so that they could not be said to create new income flows or new power to enjoy income. The tax planners contended that HMRC could not apply the legislation against these structures even though they were clearly abusive.

Where a structure meets the requirements for exemption and an associated operation involves only a minor element of avoidance, if the associated operation producing ‘tainted’ income is only a small proportion of the income of the total structure, it may be appropriate to charge only the income from the ‘tainted’ source, thus applying the legislation in a proportionate way (see INTM602860).